ElenaLytkina Botelho

KimRosenkoetter Powell

BenjaminJ.D. Wright

As the public debates the merits of the recent corporate tax cuts, most people are dangerously oblivious to a bigger and in the long run costlier problem: that of picking the wrong CEOs to lead companies in the first place.

After all, even the most aggressive tax cut affects only a relatively small portion of a company’s income. But a CEO chosen to lead a business impacts its entire bottom line and the livelihood and well-being of every employee and their families.

Yet even the best companies get it wrong time and again.

Take Ford Motor
F, +2.63%
When its board of directors promoted longtime and well-regarded company insider Mark Fields to chief executive in 2014, everyone thought they’d found the right man for the job.

Less than three years later, Ford’s stock had plunged 35% while the broader market gained 20%. Insiders complained that Fields lacked the ability to rally employees around a common strategy. He was out, and the board was back to recruiting another CEO.

This is far from unusual. In the last five years, forced CEO departures occurred at marquee companies like Procter & Gamble, Teva, Avon, Arconic, AIG, Ralph Lauren and at least 50 others in the S&P 500, according to The Conference Board. In January 2018 alone, overall CEO turnover reached its highest level in eight years.

Data from consultancy PwC shows that forced CEO turnover across the globe costs shareholders $112 billion in total returns annually. That is the equivalent to giving roughly $50,000 to every college graduate in the United States last year.

There’s no question a smooth leadership transition is one of the marks of a successful CEO and the No. 1 duty of an effective board. Yet many companies get it wrong.

The wrong criteria

So what can they do to increase the chances of getting it right in the future?

For starters, boards often prioritize the wrong criteria when they search for a new CEO. Board members are still all too frequently drawn to the “central casting” image of a CEO: a tall, larger-than-life figure who has an Ivy League pedigree and is seen as a safe pair of hands by the sitting CEO.

Central casting, however, works better in the movies than in real life. Qualities that make a CEO candidate look attractive are often very different from those that lead to strong performance. Our 10-year CEO Genome Project, tapping into ghSMART database of over 17,000 in-depth assessments and over 13,000 hours of interviews, debunked conventional wisdom about what a good CEO looks like. For example, 8% of CEOs in our sample didn’t graduate college. While boards are attracted to likable extroverts when hiring CEOs, data show that introverts aren’t any less likely to succeed.

On the flip side, having a strong accent cut an individual’s chances of securing the CEO job in a U.S. company by a factor of 12 compared with those without one, while (no surprise!) showing no impact on performance.

Shockingly, when we compared attributes statistically associated with high CEO performance and characteristics associated with likelihood of being hired into the CEO role, only one (!) of those characteristics overlapped. CEO candidates who demonstrate they can be counted on to reliably deliver consistent results are twice as likely to get a CEO job and 15 times more likely to deliver strong performance than those who don’t excel at reliability. Beyond reliability, there is a costly misalignment between what it takes to get hired into the CEO role and what it takes to perform well. No wonder succession goes awry so often.

So what underappreciated qualities make a good CEO? In addition to reliable delivery, CEOs who are statistically more likely to succeed spike on three other leadership behaviors: they decide quickly, adapt proactively and engage with a broad range of stakeholders without shying away from conflict.

Yet having the right set of criteria is insufficient. CEO selection is highly charged politically and often falls victim to power plays, groupthink and bias.

Increasingly the best CEOs and boards engage expert third parties to ensure objectivity and rigor in the succession process, often pointing boards toward candidates they might otherwise miss or undervalue.

Microsoft
MS, +2.73%
found this third-party objectivity from an unexpected place. When Steve Ballmer announced he was stepping down as CEO in 2014, a high-stakes beauty parade ensued. Over a dozen candidates were considered — often publicly thanks to leaked information. Fortune called the process “a circus,” and that this “isn’t how it’s supposed to work.”

Currency

Only one thing. It worked out well for Microsoft shareholders. The board ultimately selected Satya Nadella, who is widely considered a success and continues to hold the job. Activist shareholder ValueAct was instrumental to the process, pushing for a clear set of selection criteria and introducing external data into candidate evaluation. That ensured the board didn’t get overly swayed by glossy resumes and marquee pedigree and instead prioritized factors connected to shareholder value. ValueAct dissected performance and strategies of businesses run by candidates under consideration to inject hard facts into evaluation.

While ValueAct owned less than 2% of outstanding Microsoft shares, it harnessed investor discontent to become the first activist shareholder to obtain a seat on Microsoft’s board, giving them a bully pulpit to influence CEO succession.

While the Microsoft story had a happy ending, it can hardly be recommended that companies invite activist shareholders to facilitate CEO succession. Instead, they would be well served to bring in trusted agitators to proactively ensure the process is guided by objective data, not gut instincts.

Many current CEOs were anointed by their predecessors with only a surface level of engagement by the board. Forced CEO departures at marquee companies have sounded an alarm bell with forward-thinking boards and CEOs. As a result, leading companies increasingly turn to outside advisers several years in advance of a CEO transition to help objectively evaluate candidates and groom them for the role.

That’s a good call. Expert input and rigorous objectivity are desperately needed in the CEO succession process. There’s too much at stake to continue with status quo approaches that cause the costly misses in CEO selection.

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